You’ve been hunting for that perfect rehab deal like a Neanderthal stalking a mighty Mastodon. You’re sure you’ve found it. The after repair value and renovation costs will allow for a hefty profit. You should even be able to set a price that will result in a quick sale when the rehab is complete. There is only one teensy-weenie thing left to do – find the money to make the purchase of the property.

Back in the ancient, olden times (early 2007) it was fairly easy. You would seek out a hard-money rehab lender. Sure, the terms were steep, but the financing cost was built into the equation. As long as the numbers penciled out you could get funded. It was even pretty common to include the cost of purchase and repairs and have the interest financed right into the deal. If you did it right you didn’t need much, if any, of your own money.

Things Ain’t What They Used To Be

Here we are a short time later and the easy money is gone. Rehab loans can still be had, but things sure are different. A novice rehabber has little hope of obtaining financing at all. The experienced rehabber is facing a lending environment that has changed dramatically. No money down? Forget it. All costs rolled in? Fat chance. All repair costs included? In your dreams. These days the lenders want you to have significant skin in the game.

It’s hard to blame the lenders. They have been burned so often in the recent past that they had to change the rules. While it is easy to say that they had no one to blame but themselves, you can’t fault them for adjusting to the realities of a changing market. The rehabber has to adjust as well, unless he is going to pack up his tent and go home until things change.

What’s a Rehabber To Do?

It’s more important than ever to seek creative ways to fund a deal. If you have equity in your own home, try using a Home Equity Line of Credit, or HELOC. Lately many banks have been reducing the credit limits on existing HELOCs, so be careful there. The advantage of HELOCs are that you are a cash buyer, you can use the money as needed for the deal and repairs, and when you pay it back it is there to use again.

Can’t use a HELOC? Look for owners who are willing to hold a short-term note while you complete the rehab. A friend of mine made an offer on a house with no money down, the owner holding a note for two years and payments deferred for six months while he completed the rehab. The seller accepted the terms without a fight. It can be done.

Learn about “subject to” deals where the existing financing remains in place. This allows you to buy a property without have to obtain financing. If the seller still has equity in the property, ask him to defer taking his share until you complete the rehab and sell the property. When people are in desperate need of selling a property, they will agree to all sorts of crazy terms. Try it, you’ll like it.

Creativity Is Key

The point is to look for alternative ways of making deals happen. Instead of thinking, “it can’t be done”, ask yourself, “how can I do it?” In a nutshell, think outside the box. These are challenging times. Those who rise to the challenge will succeed.

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Tags: creative finacing, financing, hard money, heloc, home, lender, property, real estate, real estate investing, rehab, Rehabbing

1. What is the process for Hard Money Loans?
   Hard Money Loans provide Investors access to capital to purchase investment properties. They can fund quickly, typically within 72 hours of receiving the final docs from the Title Company. Hard Money is available for adequately collateralized loans on single-family residential houses and other Real Property including commercial projects.

2. What is the interest rate?
   The interest rate depends upon the Lender. The rate will range from 10% interest only to 18% interest only annual interest rate payable monthly in most cases. Some Lenders will defer interest payments to payoff, benefiting investors that do not want payments during rehab.

3. What Loan-to-Value are Hard Money Lenders looking for?
   Typically a loan does not exceed 70% of the after-repaired-value (ARV). This figure is calculated by an appraiser and consideration of repairs.

4. How long is the loan for?
   Typically write the notes from 3 months to 12 months depending on the Lender and your needs. Longer the term can lead to increased costs or interest rate.

5. What are the costs?
   All loans will require Title Policy, Insurance, and Appraisal. These services come with fees that can range from a few hundred to a couple of thousand dollars. Most require origination points ranging from 2 to 10 points.

6. Can I get money pay for repairs?
   Yes. Most Lenders require a “Draw Request” form to be filled out to identify the completed repairs to the property, copies of the invoices from the contractors or sub contractors. After work is inspected, draws can be dispersed. Typically work is not paid in advanced.

7. Does my credit matter?
   Maybe. Hard Money Lender do check credit, not necessary for credit scores, but to check for bankruptcies, foreclosures, charge offs and collections. They look for ability to repay. The loan is more collateral based, which means they look really closely at the property.

8. Do I need to put any money down?
   In most cases, Yes. Most lenders want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Expect to pay all origination/discount points and other costs at or before closing. If you cannot afford to close you typically cannot afford to take out this type of loan.

9. Can interest to be deferred to the end of the loan?
   Sometimes. Most have interest payable monthly. Again, if you cannot afford to close you typically cannot afford to take out this type of loan.

10. How does Hard Money compare to a traditional non-owner occupied investor loan?
    This would be like comparing apples to oranges. Hard Money has a very specific purpose. Typically these loans are for quick turn around or after repair situations. Conventional financing is used for your traditional rentals and long term hold scenarios. As the foreclosure market increase you will find investors to use Hard Money as way to secure the property in a short period of time then refinance into Conventional finance.

Tags: After Repair Value, ARV, community first financial, Conventional financing for investors, Hard Money Loans, HML, Investor Loans, troy schuricht

In previous weeks we discussed rehabbing a home for personal use (Getting Started In Rehab) and rehabbing for use as a rental (Rehabbing a Rental Property). This week we will look at rehabbing with the intention of flipping. This is, by far, the riskiest of the three. However, it can also be the most lucrative if you do it right. The key word here is “if.”

Swimming in a Pool of Sharks

When rehabbing to flip it seems that every problem is magnified. Never mind Murphy’s Law, in rehab it seems as if Murphy has moved in with you. The most pressing problem is usually your holding cost. This is especially true if you are using hard money financing. You also have the risk of the market changing during the course of your rehab. It may not be as easy to sell as you thought or had hoped. You may experience weather-related delays or problems finding the necessary contractors.

Sometimes you can experience something that seems to come from out of the blue. Shortly after Hurricane Katrina hit New Orleans I was rehabbing a house in Nevada. I was nearing completion and I needed about 10 sheets of drywall. I went to the only lumberyard in the area and was told that they don’t have any sheetrock at all. When I asked when they expected to get some in, I was told that a delivery was coming in on Tuesday. I figured that wasn’t too bad since it was Saturday. Then I was informed that the load that was coming in had already been sold. I could reserve some from the next delivery two weeks later! It seems that all available building materials were being diverted to Louisiana to help in their efforts to recover from the storm. I had to drive 250 miles one-way to find the material to complete the project. All told, I lost about three days. That may not be much time when you are working on your own home, but when working on a flip it can be a huge problem.

Time Is Money

Managing a rehab project can drive you crazy enough to think that you are hearing voices in your head. What you should be hearing is a ticking clock, like the one on 60 Minutes. Every tick you hear just cost you money. Contractor doesn’t show up…tick, tick. Failed an inspection…tick, tick, tick. Unexpected problem arises…tick, tick, tick, tick. Project is behind schedule and another mortgage payment is due… tick, tick, tick, tick, tick…BOOM!

Effective management of the rehab is the key to a successful deal. If you do this part poorly you will feel it in your wallet. Some important points are as follows:

Tags: flip real estate, flipping, real estate investing, rehabber, Rehabbing

A few years ago, I bought a house that had been infested with black mold but it had been cleaned up by a professional remediation company months before I had bought it.

The house had an ARV over $300,000 and I got it for $160,000. Most of the walls did not have drywall and it was obvious that the mold had been treated as the wood framing had all been treated with Kilz paint. The rehab ran about $50,000 for the 5 bedroom, 3800 square foot house and we put it on the market for less than the going rate in hopes of a fast sale.

We had a lot of traffic during the first month. A lot of families were interested in the house because it was located in a nice part of Dallas and the house was perfect for a family.

The feedback we were given was almost all positive. Kids seemed to like the basketball court in the back as well as the swimming pool on the side. The men had commented how they were impressed with the media room and the large 3-car garage.

We were told the women liked the all new kitchen, improved master bathroom and how close the schools were.

We wondered why no one had made an offer on the house with such positive feedback.

In Texas, sellers are required to disclose and past mold issues. We had listed the previous mold problem on the sellers disclosure and provided a copy of the environmental report. I had personally located the source of the moisture that had led to the mold and corrected it. If mold was going to show up in that house, it would have needed to come from a new source.

It didn’t matter.

Mold is one of the biggest, most over rated issues in real estate. It is very easy to get rid of yet it continues to get negative attention.

We were trying to reason with mothers. When it comes to mothers and the health of their children, there is no room for compromise. To go to the extreme, we could have bulldozed the house and I doubt I could find many mothers who would buy the property as long as they knew there had been a previous mold issue.

I have asked mothers who have attended my classes if they would ever knowingly buy a house that had a previous mold issue, even if it had been cleaned up.

Thus far, I have not had a single mother admit that they would.

The bottom line is, no matter who might be buying the house or making the payments on a house… If the buyer has a family, the mother decides whether or not a house is bought.

It ended up taking 13 months to sell that house. The carrying costs added up to over $20,000 and in the end, it was bought by a pilot with American Airlines who was single and had no kids.

People say that “Mother Nature” is not something to mess with. I agree with that and I also agree that a “Mothers Nature” is not something to mess with either.

In the end, you won’t win that battle.

Last week we discussed rehabbing a home for personal use (Getting Started in Rehab ), this week we will explore rehabbing for the purpose of renting. Of the three main types of rehab, personal use, renting and flip, the rental falls in the middle in terms of risk. If the rental market is strong where the house is located, you do not have to worry about your exit strategy.

A simple fact of real estate investing is that renters will not take care of a property the way an owner would, in most cases. Another fact is that renters do not have the same expectations as buyers when it comes to quality. A person looking to buy a property might expect ceramic tile floors and granite countertops where a renter is quite satisfied with vinyl flooring and a laminate counter. This means that you can spend a lot less money on the rehab if your ultimate goal is to use it as a rental property.

Basic Systems

Tenants and buyers will both have certain expectations. They are looking for a home that has the basic systems in good working order. This means that the plumbing and electric must be adequate, the heating system works properly, the roof keeps the house dry and, in warmer climates, the air conditioning functions, as it should. With a rental, if these systems are not in order you can expect to have higher than normal maintenance costs.

Regardless of the ultimate goal, any rehab should include bringing the basic systems up to an acceptable level of performance. This is not an area where you should cut corners. Upgrading the electric or the plumbing doesn’t have the pizazz of a new kitchen or bath and won’t add much value on resale or yield a higher rent. However, a house with the basic systems in poor condition can subtract value and make it difficult to sell or rent a property.

Durability Counts

Renters tend cause a greater amount of wear and tear than owners do. That being the case, you should usually choose items of greater durability wherever possible. When choosing carpet, paying a little more for a product with better durability may actually be less expensive in the long run. If you can avoid using carpet in certain areas, even better. You could consider using a laminate flooring product in high traffic areas.

When the time comes to sell a property, you can go back and complete the rehab. The time to do the fancy things and add the amenities that buyers love is when you are ready to sell. There is no point in doing a lot of high-end, high-cost rehab on a rental. More likely than not, you will just need to do it all over again when you are ready to sell.

Buy It Right

One of the most difficult aspects of real estate investing is finding property that will provide a positive rental cash flow. As hard as it is, it is significantly easier if you buy rehab property. Since a fixer-upper should be available for well below market value, it is likely to command a much higher rent as a percentage of purchase price. House “A” and house “B” may command the same rent if they are in comparable condition. However, house “A” may sell for $100,000 at full retail, but house “B” is selling for $50,000 with $20,000 in repairs needed. The total costs for house “B” was $70,000 but will rent for the same amount as house “A” even though that house costs $30,000 more. That could well be the difference between a house that helps put food on the table as opposed to a house that eats you alive.

A fool and his money are soon elected. - Will Rogers

rehabbing, renting, rehab, flip, Tenants, fixer-upper

Tags: real estate investing, Rehabbing, rental-property

You want to rehab houses, but where do you start? We see the fix-and-flip “reality” shows that, somehow, manage to have no basis in reality. How hard can it be to buy a house, rehab it, sell it, and retire to a life of luxury on the French Riviera? On TV, it all happens in thirty or sixty minutes. Easy, right?

Before you start it is imperative to have your own financial house in order (See last week’s article. ). Jumping into rehab without a solid foundation will make it very difficult, if not impossible, to succeed.

Choose Your Weapon

Rehabs fall into three basic categories: personal use, rental, or flip. Each type carries a different level of risk. My recommendation for most people is to start by rehabbing a house for their own personal use. It carries the least amount of risk since you will not have the added carrying cost of a second property. If you live in the house while you are renovating it, you just have your regular living expenses.

There are other advantages to living is a house while rehabbing it. You do not have the same time pressure. When you are rehabbing a property with the intention of flipping it, you are losing a little piece of your profit everyday. Holding costs are a ticking clock, time is money. When you experience a delay, you lose money. If the market makes a quick sale difficult, you lose money. The risks associated with flipping are enormous. The current real estate market conditions just make it worse.

Make It Your Own

When you are renovating a house with the intention of flipping, you need to keep the end user in mind. This usually means making conservative choices that will appeal to the widest number of potential buyers. If the house is going to be your residence you have the ability to incorporate your own personal taste. If you want purple walls with a pink ceiling, then go for it. Rehabbing a house for your own use allows you to create a home that fits the way you live.

You still need to keep resale in mind if you have any intention of selling in the near future. Determine what you resale timeframe might be and work with that in mind. If it is going to be a long-term hold you should do whatever makes you happy and fits your lifestyle.

Learn As You Go

No matter how much you study and prepare, first time rehabbers will make a lot of mistakes. It’s much easier to learn from those mistakes if you are not under the constant pressure of having to complete a flip. My first rehab was a major learning experience. I had the luxury of time. I was able to take the lessons learned and carry that knowledge forward into future projects. If that first rehab was intended to be a flip I would have lost a lot of money and it probably would have been my last project.

Instead of trying to earn a bazzillion dollars on your first deal, look for one that can propel you to future success. Start small and keep the project within your ability. With each success you can move into bigger and tougher projects. As your ability grows, your profits will increase and your profits will soar.

Happy rehabbing!

I honestly think it is better to be a failure at something you love than to be a success at something you hate. - George Burns

rehab, houses, flip, rehabbing, renovating, home

Tags: flipping, investment real estate, Rehabbing

Who hasn’t had the rehabber’s fantasy? Let’s buy that run-down house, fix it up and make a fortune! The problem is that most new investors venture into this arena unarmed. There is the usual problem of paying too much or grossly underestimating the time or money that is needed, but there is another problem as well. Not every broken down shack is a good rehab candidate.

Finding distressed property is easy. That doesn’t mean that you are going to make any money. So many novices wind up buying a property that no amount of rehab can help. It starts off as a dog (no offense to pooch lovers). They do all sorts of renovations and run into many costly problems. Somehow they get to the end of the project and put it up for sale. Then the house sits, and sits, and sits some more.

So What Went Wrong?

Why won’t it sell? They updated the kitchen and bath, painted everything that didn’t move, refinished the floors, put in new carpet and did anything else that was needed. The problem may be the house itself. Perhaps it is functionally obsolete and nothing short of a bulldozer will help. Small bedrooms, poor layout and an overall lack of utility could be scaring the buyers away. Perhaps the location is poor, or the area is in such a state of decline that there are very few buyers.

Another common problem is that the renovations far exceeded the neighborhood standard and now the price is way too high. The house may be priced so far above the competition that it will not attract lookers, let alone buyers. A house that started off as a dog is now a dog with expensive renovations. The house lacks the “wow” factor and will not sell at any price, and certainly not a profitable one.

How to Make a Profit

A house that is a dog can still be profitable. You need to adjust your expectations of what the house could be. If you purchased it cheap enough, you could use the “lipstick on a pig” approach. You don’t deny the fact that it’s a pig, you just try to make the pig a little prettier. Instead of ripping out the kitchen, just paint the cabinets and add new hardware. Perhaps the bathroom gets a new sink and paint and the carpets are shampooed instead of being replaced. A quick coat of paint seals the deal.

The idea is to spend as little as possible in order to do a quick turn around. You are not looking to make a six-figure profit, just a reasonable one. There are many deals that can be done profitably without out all of the TV style renovations. Cheap houses in a poor neighborhood will never command a high price. However, you can still make money if you buy right and keep your costs down.

Beauty is in the eye of the beholder and it may be necessary from time to time to give a stupid or misinformed beholder a black eye. – Miss Piggy

rehabber, rehab, distressed property